The Credit Scoop

Every relationship takes work. While we all want the love to be there when we need it, ignoring your relationship, even just a little, can spark the beginning of the end.  The same is true for your relationship with your credit.

Here are some ways to keep the love alive and to keep that credit relationship thriving:

Be on Time:

Pay your bills when they’re due. Whether it’s a mortgage, car loan, or credit card, being on time with your payments will keep your report staying strong.

Maintain a Healthy Balance:

Maxed out credit will bring down your score. Work to stabilize that healthy credit you’ve worked for by keeping your balances to 20% of the high limit on revolving accounts.

Keeping the Spark Alive:

While having a number of open accounts is good, inactivity on them is not. A healthier credit score depends on using your accounts. To give your report that extra glow, mix it up by pulling out some of those old store credit cards once in a while.  

Taking the Long View: 

An enduring credit relationship depends on having long terms credit goals. When you apply for credit, remember you will be building a history with that creditor.

Yes, credit is a lot like love. We all want it. We all need it. But it’s a two way street, and finding ways to maintain it is the key.

Because there is an assumption that those with the worst credit make the least amount of money, I’m frequently asked how my clients are able to afford my services. When I explain that most of my clients have good incomes, they’re left even more perplexed. Why, if they make so much money, are their FICO scores so low?

In the recent frenzy surrounding Michael Jackson’s death, an MSN article http://blogs.moneycentral.msn.com/smartspending/?fpn=michael%20jackson%20s%20credit%20score%20564 revealed that he had low FICO scores – 592, 524, 575. Well, to put it simply, Michael Jackson is my typical client.

Jackson obviously had a large income. But he must have also been sloppy when it came to paying his bills. And while I assume he had at least one financial advisor watching his investments, financial advisors don’t usually spend their time thinking about FICO scores or loan rates. That’s why much of my time is spent talking to my Jackson-like clients about the relationship between higher interest rates and unhealthy credit.

For example let’s imagine that Michael Jackson had a 5 million dollar loan. Let’s do some math on how much money I might have been able to save Mr. Jackson had he come to me for credit help:

The monthly payment for a 5 million dollar loan at 9% is $ 40,231.13.

Let’s say I helped him with his credit, put him on track to keep building better credit, and got his interest rate lowered to 7%. That 5 million dollar loan’s monthly payment would be reduced from $40,231.13 to $33,265.12.

Then let’s say, 12 months later, his FICO improved even more and he became eligible for a new rate of 5%. Instead of $33,265.12 per month, the payment would now be reduced to $26,841.08. The loan payments would be reduced by nearly half of the original loan.

We should all take a lesson from Michael Jackson. Whether your annual income is $25,000 or $10,000,000, being on top of your credit, or hiring someone who can do it for you, can save you an enormous amount of money.

Here is link to see how much money your FICO is costing you on a mortgage: http://www.myfico.com/myfico/CreditCentral/LoanRates.aspx

As of August 20, 2009 credit card companies must:

Have your statement to you 21 days before the due date

Give you 45 days notice of increasing your interest rate

You have option to reject new rate, but if you chose that option the account will be closed with old rate and you have a certain amount of time to pay off the existing balance.

Because 30% of your FICO score is based on amounts owed on revolving credit, I can’t say it enough: watch your balances!

Being over your limit or near your limit on revolving accounts will detract points from your score. Revolving accounts are credit cards and lines of credit. I get asked all the time:  what if I pay off my auto loan?  It will make no difference. It will not affect your FICO score. FICO is only concerned with how consumers use their open lines of credit.

It’s simple. Paying down your balances to 20% or less of the high limit will give a boost to your score – sometimes as much as 50 points.

ONE CAVEAT:

Home equities are revolving balances. In other words, home equity loans do not report as an installment loan like a regular mortgage. Because paying down a home equity is not an option for most folks, consider asking your bank to recode your home equity as a mortgage. If they won’t, consider getting a second mortgage to pay off the home equity. It will make a difference in the long run.

I’ve never heard so many people talking publicly about credit. And it’s been wonderful to hear more and more people taking stock of their unhealthy credit use and control of their financial lives. But I’m worried when I hear folks saying things like “I’ve learned my lesson, I’ve paid off my credit cards, closed them out, and now only use my debit card.”

Because debit cards are not approved lines of credit that go on your credit report, because they do not to show any kind of history, without other lines of credit, one has no payment history to speak of. And this is not good for your FICO score.

Here are some tips to keep in mind to help you from walking away from credit and to keep you building better credit.

1.      Every year, take advantage of any 0% transfer credit card balances. This will build new credit while saving money on interest at the same time. It’s best to build at least two new accounts a year.

2.      Look at your credit report and make sure all your credit card companies are reporting a high limit. I see many creditors only report the balance due.

3.      Maintain recent activity on accounts. Take out the store card you have not used in years and use it! If you are going to shop in that store, you might as well use the card they gave you and pay the bill when you get home.

4.      Pay down your credit card balances to 20% or less of the high limit.

5.      Monitor your credit to be aware of who is reporting what on you.

Embrace and enjoy the credit you have established over the years. Do not throw it away.

Bankruptcy –10 years in public record section from date filed. 

All the accounts listed included in the bankruptcy

remain for seven years.

Closed accounts – Ten years from date closed.

Collection accounts – If account is paid it will be

marked as paid, but will still remain for seven years

from the date account went into collection or charge-off status. 

Inquiries – Two years.

Judgments – Seven years from date filed.

Late payments – Seven years from the date reported late.

Lost credit card –Two years, but if account has any late 

payments it remains for seven years.

Tax Liens – Seven years from paid date, but unpaid liens

remain fifteen years from filing date.

All your ex’s stuff is out of the house, the divorce is finalized and you are basking in your new independence. But your divorce decree has your ex responsible for the Visa card and part of the mortgage you once held together. Your ex may seem gone, but the divorce decree means nothing to a creditor or the credit reports.

The judge said your ex had to pay the Visa, but what if those payments are late? Any late payments will go on your credit report. In fact that goes for any account you held jointly during your marriage. When the lender gave you the funds, when you signed the dotted line, they did not care if you were married, domestic partners, business partners or friends. They gave you the account because you both applied for it.

The only way to protect your credit with a divorce is have your ex pay off the account. If that is not a financial possibility, try getting your name taken off the account. Creditors sometimes require reapplying for the same account or establishing a new account with a balance transfer.

In the end, make sure any and all joint accounts that have a zero balance and are closed at the time of your divorce. That way there’s no possibility of you being responsible for any new debt your ex accrues and you do not have to worry how he pays his bills anymore!

The birds are chirping, the grass is greening and it’s time to clean up the house and de-clutter the garage. But don’t forget about your credit! Most of us also have junk that needs clearing from our credit reports. It may a wrong address, a late payment on an account or a new collection that you had no idea about. Spring is the time to roll up your sleeves and start the work. Beginning any project is often overwhelming, but in the end you will have a better, cleaner report. Follow these simple steps:

Obtain copies of your credit reports. You need to get one from Experian, Equifax & Trans Union. After you have them, go over all the information with a highlighter. Begin with the simple items – name, address, date of birth and social security number. Make sure only your information is on the report.

Review all the accounts listed on the credit report and make sure they all belong to you. Look at all the accounts that are reporting late payments. Many of those accounts may have never been late or might be old disputes you were told would never show up.
Dispute credit problems with each credit bureau. This can be done online, by mail or over the phone.

Contact info:

http://www.experian.com/
http://www.transunion.com/
http://www.equifax.com/home/

If you found a collection account, make sure you call the collection company to verify the collection. If you want to dispute the collection, be sure to write both the collection company and the credit bureaus. If you do not feel sure that the collection company will resolve the matter, call the company that gave them the account to collect. For example, if it was an unpaid co-pay to your doctor, call them and explain how this is now damaging your credit. Offer to pay them directly and ask them to recall the account from the collection company.

Your work is done. The garage floor is swept clean and so, too, is your credit report. Enjoy it and know that this year’s work will make next year’s clean up less daunting.